F.D.I.C. v. Napert-Boyer Partnership

• Decision Date: 27 February 1996
• Docket Number: NAPERT-BOYER,No. 14230,14230
• Citation: 671 A.2d 1303,40 Conn.App. 434
• Court: Connecticut Court of Appeals
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Receiver of New Connecticut Bank and Trust Company, N.A. v.PARTNERSHIP et al.

Page 1303

671 A.2d 1303

40 Conn.App. 434

FEDERAL DEPOSIT INSURANCE CORPORATION, Receiver of New Connecticut Bank and Trust Company, N.A. v. NAPERT-BOYER PARTNERSHIP et al.

No. 14230.

Appellate Court of Connecticut.

Argued Sept. 21, 1995.

Decided Feb. 27, 1996.

Raymond L. Baribeault, Jr., with whom, on the brief, were Andrew J. Brand and S. Joel Suisman, New London, for appellants (named defendant et al.).

John J. Graubard, East Hartford, with whom, on the brief, was Thomas R. Legenhausen, Hartford, for appellee (plaintiff).

Before FOTI, LAVERY and LANDAU, JJ.

LAVERY, Judge.

This is an appeal by the defendants ¹ from a judgment on two promissory notes for $12,301,165.61. The notes called for a variable interest rate of 1 percent above the prime rate of Connecticut Bank and Trust Company (CBT). The defendants claim that the trial court improperly (1) substituted the prime rate of Fleet Financial Group for the prime rate of the failed CBT, (2) found that a prior foreclosed $1 million mortgage did not merge with the two notes in question and that General Statutes § 49-1 ² did not prevent the plaintiff from seeking a judgment on the mortgage debt, (3) found that the defendants were liable for late fees after acceleration, and (4) found that the defendants' special defenses, claims of setoffs and counterclaim for damages were not supported by the evidence and were barred by the D'Oench, Duhme doctrine. ³ We agree with the defendants that the plaintiff did not prove that the substitution of the prime rate of Fleet Bank was reasonable and that the trial court's use of judicial notice was improper. We also conclude that there was no evidence of how the interest rate was calculated during the period that New Connecticut Bank and Trust Company, N.A. (New CBT), existed, and that late charges should not have been assessed against the defendants once the notes were accelerated. Accordingly, we reverse the judgment of the trial court and remand the matter for further proceedings.

The trial court found the following facts. On or about August 26, 1988, the defendant Napert-Boyer Partnership (Napert-Boyer) entered into a construction loan agreement with CBT for $8.8 million to construct a condominium in Groton. The loan was evidenced by a promissory note that was secured by a first mortgage on the property. Napert-Boyer experienced problems with the project and, at its request, the parties executed a loan modification agreement in October, 1989.

Pursuant to the loan modification agreement, CBT provided Napert-Boyer with an additional $1 million revolving line of credit. Napert-Boyer and the defendant George Boyer, individually, executed a $1 million promissory note in favor of CBT and granted it a second mortgage on the project. Boyer became a comaker on the $8.8 million loan, and CBT also refinanced a personal line of credit to Boyer who executed a $300,000 promissory note in favor of CBT. Upon default by the defendants, CBT instituted proceedings in June, 1990, to foreclose the second mortgage and to obtain judgment on the $300,000 note executed by Boyer.

On January 6, 1991, CBT became insolvent and the Federal Deposit Insurance Corporation (FDIC) was appointed receiver of CBT. The FDIC, pursuant to 12 U.S.C. § 1821(n), conveyed CBT's assets to a bridge bank, ⁴ New CBT. On July 11, 1991, the FDIC dissolved New CBT, took control of its assets, and was substituted as the plaintiff in this action. ⁵

In 1991, the FDIC obtained a judgment of strict foreclosure on the $1 million second mortgage, which was affirmed by this court. See Connecticut Bank & Trust Co., N.A. v. Napert-Boyer Partnership, 29 Conn.App. 901, 614 A.2d 493 (1992), cert. denied, 224 Conn. 924, 618 A.2d 530 (1993). Titled vested in the plaintiff as receiver on March 30, 1993. The FDIC moved for a deficiency judgment. The parties resolved the deficiency judgment motion by stipulating that the value of the property was equal to the sum of the debt due on the $1 million note and mortgage, plus the outstanding real estate taxes due on the property. In November, 1993, the FDIC amended its complaint seeking to recover on the $8.8 million note and on the $300,000 note. The trial court rendered judgment in favor of the FDIC.

The trial court found that it was commercially reasonable for the FDIC to substitute the prime rate of Fleet Financial Group for the prime rate of the defunct CBT. The trial court also found that the $8.8 million note represented a separate obligation and transaction from the $1 million note that was secured by the foreclosed mortgage, and that General Statutes § 49-1 did not apply. Finally, the trial court held that the defendants' special defenses and counterclaims were not supported by the evidence and that the defendants' claim of setoff was barred by the prior stipulation on the motion for deficiency judgment on the $1 million loan. ⁶

I

The defendants first claim that the trial court incorrectly substituted the prime rate of the Fleet Financial Group for the prime rate of the failed CBT. The trial court found that the FDIC appropriately substituted a commercially reasonable prime rate. In its response to a motion for articulation, the trial court stated that one of the plaintiff's witnesses "testified that in substituting an interest rate for that of the failed CBT, FDIC as receiver utilized the published prevailing prime rate of Fleet Financial Group. The court takes judicial notice of the fact that Fleet Financial Group is a major bank holding company with many of the banks under its aegis located in this region of the country. To substitute an interest rate based on that then being utilized by a comparable commercial lending institution appears to be a logical, fair and reasonable procedure. The defendant has offered no evidence to the contrary." We agree with the defendant and conclude that the trial court improperly took judicial notice of these facts.

"When a variable interest rate is based on the rate of a failed institution, the trial court must determine whether the substitute rate is reasonable by examining the documents and testimony offered by the plaintiff. See Federal Deposit Ins. Corp. v. Blanton, 918 F.2d 524, 532 (5th Cir.1990); Federal Deposit Ins. Corp. v. La Rambla Shopping Center, 791 F.2d 215, 223 (1st Cir.1986); Federal Deposit Ins. Corp. v. Cage, 810 F.Sup. 745, 747 (S.D.Miss.1993)." Central Bank v. Colonial Romanelli Associates, 38 Conn.App. 575, 578, 662 A.2d 157 (1995); see also Mechanics & Farmers Savings Bank, FSB v. Delco Development Co., 232 Conn. 594, 597-98, 656 A.2d 1034 (1995). ⁷

In Federal Deposit Ins. Corp. v. M.F.P. Realty Associates, 870 F.Sup. 451, 456 (D.Conn.1994), a case similar to this case, the United States District Court in Connecticut stated: "[F]ederal law, which now governs this action, supports the conclusion that the FDIC is empowered and entitled to establish an alternate prime rate." See, e.g., United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979) ('This Court has consistently held that federal law governs questions involving the rights of the United States arising under nationwide federal programs.'); Linde Thomson Langworthy Kohn & Van Dyke, P.C. v. RTC, 5 F.3d 1508, 1512-13 (D.C.Cir.1993) (Federal law applies to claim of attorney-client privilege where RTC filed petition to enforce subpoena duces tecum issued to former law firm which had connections to failed thrift.) Under 12 U.S.C. § 1821(d)(2)(B)(ii), the FDIC, as receiver, assumes the ability to 'perform all functions of the institution in the name of the institution which is consistent with the appointment as conservator or receiver....' In the instant case, one such right must necessarily include the right to establish a prime rate called for under the failed institution's note.

"Accordingly, several courts which have considered the issue have approved the use of the prime rate of another bank when a note becomes the asset of the FDIC. See FDIC v. Condo Group Apartments, 812 F.Sup. 694, 699 (N.D.Tex.1992). Likewise, this Court already has found that the FDIC may substitute an appropriate interest rate to apply to a loan that is based upon the prime rate of a failed bank. See, e.g., FDIC v. 272 Post Road Associates, Recommended Ruling on Plaintiff's Motion for Summary Judgment of Strict Foreclosure, Civil No. 5:91CV433(TFGD) (D.Conn. March 11, 1994); accord FDIC v. Rogers Park I, 1990 WL 482141 (W.D.Okl.1990) (Under Restatement [Second] Contracts § 204, when parties have not agreed with respect to an essential contract term, the Court may supply one which is reasonable under the circumstances.)"

An examination of the evidence and exhibits presented in this case shows that the FDIC used the prime rate of Fleet Financial Group from the time the FDIC took over from New CBT. There is no evidence in the record pertaining to the interest rate used during the time New CBT existed. There was testimony that Recall Management Corporation, FDIC's attorney in fact, was a wholly owned subsidiary of Fleet Financial Group, and that, in calculating the interest rate, it used the prime rate of its parent company Fleet. We find that there is no evidence in the record from which the trial court could have ascertained the reasonableness of the substitute rate. See Central Bank v. Colonial Romanelli Associates, supra, 38 Conn.App. at 578, 662 A.2d 157.

The trial court took judicial notice that Fleet Financial Group is a major bank holding company with many of its banks located in the region, and that, because Fleet Financial Group is a comparable commercial lending institution, the use of its prime rate appeared to be logical, fair and reasonable. The court also noted that the defendants offered no evidence to the contrary. The trial court, however, gave no notice to the parties that it was going to take judicial notice of the status of Fleet Financial Group as a comparable bank...